CERC draft tariff guidelines negative for state power companies

Country's largest generator NTPC's returns would decline if the tariff incentives are linked to plant load factor

The Central Electricity Regulatory Commission(CERC) on Tuesday announced the draft norms on tariffs for the power sector which will be applicable between FY15 and FY19. Analysts say that these norms significantly tighten operating norms for power producing and transmission companies across the board. With the regulator proposing to tighten operating norms, the going may become tough for state-owned generators and transmission companies.

Emkay Global believes if these draft norms are accepted, then the huge impact will be negative for NTPC, mainly because these regulations propose shifting of incentives to the company's plant load factor (PLF) from plant available factor (PAF). Also no tax grossing up of return on equity is a big negative. 

 

While the market was expecting the tax grossing up to go, the shift from PAF to PLF, as it means that the regulator is discriminating between the private generators and state-owned ones. While the private generators have been given the permission to raise tariffs, this would cap NTPC's returns as it would suffer if the badly managed state electricity boards do not draw power. What this indicates is lack of proper thinking, says one analyst with a foreign brokerage. 
 

So far, state-owned NTPC has seen its incentives linked to the available capacity it has for the state electricity boards. So even if NTPC's plants did not have coal and it could not generate required power it would be able to avail of the benefits. But now the regulator is proposing to link its incentives to actual power generated and the plant load factor (the capacity at which the power plant is operating). PLFs of most power generators have fallen below 70 per cent in recent times due to issues of fuel availability. Evidently, this is negative for the country's largest power generator. 
 

Initial analysis suggests that the impact on PowerGrid Corporation, NHPC and SJVN is likely to be limited. These regulations would impact FY15 EPS by 12-14% for NTPC, 6-8% for PGCIL, 3-4% for SJVN, and 1-2% for NHPC. 
 

The Street believes that it is best to wait and watch because a similar thing had happened in 2009 too when the CERC announced tariff guidelines for the previous five years. The final regulations are expected by fourth week of January or the first week of February. However, for the stocks to perform, the guidelines need to be modified significantly and minor tinkering may not help.